Workers Comp Subrogation

A claims examiner for a workers compensation carrier receives a voice mail that an employee of their insured, ABC Heating and Air Conditioning, has just suffered catastrophic injuries as a result of an on-the-job accident. The injured employee, a married 31-year-old HVAC technician, has suffered life-threatening injuries after falling from a roof during a routine service call. The injured employee was alone at the time of the accident, and there were no witnesses to the fall. Projected compensation benefits are in the high six-figure range.

What at first blush appears to be a straightforward workers compensation claim may, in fact, be a claim with significant potential for subrogation recovery, provided the carrier can identify a third party who is legally responsible for the employee's injuries.

Workers Comp Basics
Generally, a worker who is injured in the course and scope of employment may not pursue a direct civil action for damages against the worker's employer. (See Cal. Lab. Code § 3602.) In exchange for the right to receive workers compensation benefits pursuant to the employer's payment of such insurance premiums, the employee forgoes any direct right of action against the employer.

However, the liability analysis does not stop there, for in many instances a third party - not the employer - is responsible for all or part of the injuries sustained by the employee. This is when subrogation comes into play.

Subrogation Rights
The state Labor Code confers employers the right to pursue responsible third parties for recovery of any and all workers compensation benefits paid to or on behalf of an injured employee. (See Cal. Lab. Code § 3852.) For purposes of subrogation, workers compensation insurers are considered to be "employers." (See Cal. Lab. Code § 3852(b).) The employer's right to reimbursement from any proceeds recovered from a third-party tortfeasor takes first and full priority over any recovery by the injured employee. (Cal. Ins. Guar. Ass'n v. W.C.A.B., 112 Cal. App. 4th 358, 368 (2003).)

When evaluating the subrogation potential of any matter, counsel must assess the conduct of the potentially responsible third party. But that is only the first step. In addition, there must be a thorough review of the conduct of the injured employee, the employer, or both, for though any negligence on their part will not bear on the underlying workers compensation claim, it may drastically impact the subrogation potential against a third party.

Assessing Negligence
The law imposes a general standard of care; everyone is responsible not only for the results of their willful acts but also for any injury occasioned to another by their lack of ordinary care. (See Cal. Civ. Code § 1714 (a).)

Every person also has a duty to avoid exposing themselves to an unreasonable risk of harm. Thus, when the injured party's conduct causes or contributes to his or her own injury, it is referred to as "comparative negligence," and it reduces the amount that a third party tortfeasor will have to pay in damages. (See Li v. Yellow Cab Co., 13 Cal. 3d 804 (1975.) This principle is central to workers compensation subrogation claims because an employee's negligence cannot be imputed to the employer for purposes of reducing the compensation lien. (Kemerer v. Challenge Milk Co., 105 Cal. App. 3d 334, 338 (1980).)

When both an employee and the employer seek relief from a third party, a delicate balance exists. In these cases, although the injured worker and his or her employer are pursuing the same defendant(s), they seek different remedies. The employee requests damages; the employer, however, seeks recovery of workers compensation benefits paid to or on behalf of the employee as a result of his or her injury. The law gives the employer a lien for those benefits, and the lien may be asserted in a number of different ways, each of which is discussed below.

As noted above, an injured party's negligence may reduce the ultimate award of damages. In the subrogation context, some lawyers wrongly assume that any negligence attributed to the employee is automatically imputed to the employer for purposes of reducing the employer's lien. But that is not so. Although an employee's negligence will reduce his or her entitlement to damages, the employee's negligence is not imputed to the employer to lower the amount of the compensation lien, because doing so would, in effect, grant the third-party tortfeasor a double deduction for the same employee negligence. (Kemerer, 105 Cal. App. 3d at 337-339.)

However, though employee negligence will not directly reduce the employer's lien, it can have the indirect effect of reducing the "settlement pool" from which the lien will be satisfied. This result occurs because the total damage award will be reduced by any allocation of fault to the injured worker. Furthermore, an employer seeking reimbursement must first pay workers compensation benefits in an amount equal to the employer's own percentage of fault multiplied by the injured worker's total civil damages before it may recover any remaining portion of its lien from a culpable third-party defendant. (DaFonte v. Up-Right, Inc., 2 Cal. 4th 593, 599 (1992).) This mathematical calculation is commonly referred to as the "employer negligence threshold."

An example: Assume the injured worker is awarded $100,000 at a civil trial. The worker is assigned 20 percent comparative negligence. The employer, whose lien totals $20,000, is assigned 10 percent fault. The two defendants at trial are each allocated 35 percent fault.

Under this scenario, the total award of $100,000 is reduced by $20,000, which represents the plaintiff's negligence ($100,000 x .20 = $20,000). The employer's "threshold" is then quantified by multiplying the amount of employer negligence (10 percent) by the injured worker's total civil damages ($80,000), yielding a "threshold" of $8,000. Only the benefits paid above this "threshold" (i.e., $20,000 - $8,000 = $12,000) are recoverable by the employer. If the calculation leads to a result in which the employer has not paid benefits exceeding the computed "threshold," there will be no lien recovery for benefits paid.

With the passage of Proposition 51 in 1986 (Cal. Civ. Code § 1431.2), a comparative-fault system was adopted in California that permits a concurrently negligent employer to obtain reimbursement for workers compensation payments made in excess of the percentage of the employer's fault or liability. (Associated Constr. & Eng'g Co. v. W.C.A.B., 22 Cal. 3d 829 (1978).) Although a culpable defendant is only liable for its own percentage of noneconomic damages, joint and several liability exists for all economic damages, including the compensation lien. (DaFonte, 2 Cal. 4th at 600.)

Pursuant to Labor Code section 3864, third-party tortfeasors generally are barred from receiving indemnification from concurrently negligent employers. However, pursuant to Prop. 51, judgments against third parties may take into account the employer's negligence, and the judgment may be reduced accordingly, thus affecting the amount of reimbursement to the employer.

Passive Employer Negligence
Employers may be negligent even in the absence of affirmative misconduct. Allegations of employer negligence often reference improper or inadequate training, supervision, and/or the provision of faulty or inadequate equipment or tools. Thus, even when the employer has not engaged in affirmative negligent conduct, a seasoned plaintiffs or defense counsel can make the case that the employer's passive conduct - failing to properly train or supervise the injured employee - contributed to the accident such that the employer's lien should be reduced in an amount commensurate with its negligence.

With these basic concepts in mind, it is now appropriate to identify and discuss several common mistakes made by counsel and workers compensation carriers in the area of subrogation.

- Overlooked potential. When faced with a factual scenario such as the one presented at the outset of this article, it is entirely possible that the claims examiner may conclude that no third party is at fault, or that it would be impossible to prevail in a civil suit absent witnesses or evidence, even if a potentially responsible third party is identified. However, as will become apparent, these conclusions may be premised upon a faulty or incomplete understanding of the applicable evidentiary standards that must be satisfied to prevail in an action to recover the employer's lien.

The following hypothetical arises from an actual incident. Subrogation counsel was contacted on the day of an incident in which an employee was injured. On advice of counsel, a prompt investigation (consisting of a site inspection, photographs of the accident scene, and interviews with the employer, and others) revealed that unbeknownst to the customer (who owned the building), a tenant had placed a metal guard over the exterior roof ladder only days before the accident occurred in an attempt to prevent teenagers from accessing the roof after business hours. The tenant failed to advise anyone of this change in the condition of the premises. As a result, the employee had to gain access to the roof from inside another tenant's store. The inside access was subsequently locked by mistake, trapping the worker on the roof. The accident occurred when the worker attempted to descend the roof using the guarded exterior ladder after having been trapped for several hours.

What first appeared to be a claim with no obvious subrogation potential evolved into a case in which it was possible to demonstrate that third parties caused or significantly contributed to the worker's injury by (1) improperly guarding the exterior ladder (a code violation); (2) failing to advise the building owner, other tenants, or service personnel of the change in condition to the property; (3) trapping the worker on the roof by inadvertently locking the inside access; and (4) by installing what amounted to a tripping hazard. The lesson: In any claim, investigate thoroughly and studiously analyze the potential existence of third-party liability.

- Delay. It is settled law that when an employee receives workers compensation benefits necessitated by third-party negligence, the employer has three options to pursue recovery of its lien from the third party. (See Fremont Comp. Ins. Co. v. Sierra Pine, Ltd., 121 Cal. App. 4th 389, 396 (2004).) The first option is for the employer to file its own independent action against the negligent third party. Second, the employer may intervene in the employee's existing civil personal injury suit. And finally, if there does not appear to be any employer negligence, the employer may simply file a notice of lien in the injured worker's civil action. (This latter procedure comes with a caveat. An employer who files a notice of lien is not deemed to be a party to the employee's suit. As such, the employer exercises no control over the case. If allegations of employer negligence arise and are proven, the employer is powerless to refute them.)

The statute of limitations for an employee or employer to commence suit arising out of an employee's personal injury is two years. (Cal. Code Civ. Proc. § 335.1.) The statute begins running from the time of the employee's injury, not from the time that benefits are paid to the injured worker by the compensation carrier. There is no time limit governing when an employer may intervene in the employee's existing civil lawsuit. However, to the extent the employer intervenes late in the action, the injured employee's attorney may be able to argue that to the extent his efforts have aided the employer in proving the negligence of a third party, a portion of his fees should be paid out of the employer's lien recovery. (Cal. Lab. Code § 3856.)

Many compensation carriers make the mistake of waiting for the injured worker to commence suit and/or perform the necessary investigation. But regardless of who commences the action, delay is the enemy of subrogation recovery. That's because memories fade, witnesses disappear, documents become lost or misplaced, and accident scenes change. Failure to act promptly and safeguard evidence severely decreases the prospects for a successful suit, be it for damages or recovery of the lien.

- Backseat mentality. Too often, compensation carriers adopt what can best be described as a "backseat" mentality. The employer, either by design or inaction, assumes a secondary role, relying on the other parties to develop the facts, evidence, and arguments that will form the basis for the action. By so doing, the employer often finds itself in a position where it cannot exert any control. The practical result is that the other litigants treat the employer as an afterthought; moreover, a "nonparticipatory" employer sends a message that it lacks confidence in the case, or worse, the case is not to be taken seriously. Consequently, the employer may lose leverage during settlement negotiations.

- Penny-wise, pound-foolish. Subrogation is necessarily a study in economics. The employer's recovery is limited to the actual amounts paid to the injured employee and cannot account for increases in premiums or losses of profit. (Fischl v. Paller & Goldstein, 231 Cal. App. 3d 1299, 1304 (1991).)

All expenditures, recoveries, and settlements in pursuit of subrogation are evaluated in light of the size of the lien and future exposure to the carrier. A Pyrrhic victory in the form of a legal bill that rivals or surpasses the lien rarely results in warm feelings at company headquarters, and for good reason. Such a result evidences a lack of appreciation for the economics of subrogation; counsel should pursue only cases that are good candidates for significant subrogation recovery. Each case should promise an economic return that justifies the attorneys fees and costs necessary to achieve it.

- Inexperienced counsel. The failure to retain a seasoned litigation attorney is the single biggest mistake compensation carriers make in the subrogation arena. As the foregoing discussion illustrates, this area of law is complex and requires crossover knowledge of workers compensation and civil tort law. But make no mistake, subrogation cases are litigation matters, not workers compensation claims. Accordingly, experienced and knowledgeable litigation counsel should manage them. Engaging seasoned, trial-ready subrogation counsel is the single most important step in identifying and maximizing subrogation recovery.

Shawn M. Ridley, a partner at Howard Rome Martin & Ridley in Redwood City, specializes in product liability, toxic tort, and workers compensation subrogation matters.

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